News & Views

Don’t Focus on Average…

By 15th December 2017January 5th, 2018No Comments

Don’t Focus on Average…

“I have found that the importance of having an investment philosophy—one that is robust and that you can stick with—cannot be overstated.”

—David Booth, Chairman of Dimensional Fund Advisors

The world equity market has delivered an average annual return of around 10% since 1988.[1]  However, short-term results may vary, and in any given period, equity returns can be positive, negative, or flat.  When setting expectations, it’s helpful to see the range of outcomes experienced by investors historically.  For example, how often have the equity market’s annual returns aligned with its long-term average?  To answer this question, we have looked at the US equity market which has a much longer track record and has also delivered an average annual return of around 10% since 1926.[2]

Exhibit 1 below shows calendar year returns for the S&P 500 Index since 1926 (The Standard & Poor’s 500 is an American equity market index based on the market capitalizations of 500 large companies).  The shaded band marks the historical average of 10%, plus or minus 2 percentage points. The S&P 500 had a return within this range in only six of the past 91 calendar years. In most years, the index’s return was outside of the range, often above or below by a wide margin, with no obvious pattern. For investors, this data highlights the importance of looking beyond average returns and being aware of the range of potential outcomes.

S&P 500 Index Annual Returns 1926–2016


In US dollars.  The S&P data are provided by Standard & Poor’s Index Services Group.  Indices are not available for direct investment therefore their performance does not reflect the expenses associated with the management of an actual portfolio.  Past performance is not a guarantee of future results. Performance may increase or decrease due to currency fluctuations. 

Tuning in to Different Frequencies…

Despite the year-to-year uncertainty, investors can potentially increase their chances of having a positive outcome by maintaining a long-term focus.  Exhibit 2 documents the historical frequency of positive returns over rolling periods of one, five, 10, and 15 years in the US market.  The data shows that, while positive performance is never assured, investors’ odds improve over longer time horizons.

S&P 500 Index – Frequency of Positive Returns (Overlapping Periods: 1926–2016) Picture2

From January 1926 to December 2016 there are 913 overlapping 15-year periods; 973 overlapping 10-year periods; 1,033 overlapping 5-year periods; and 1,081 overlapping 1-year periods.  The first period starts in January 1926, the second period starts in February 1926, the third in March 1926, and so on. In US dollars.


While some investors might find it easy to stay the course in years with above average returns, periods of disappointing results may test an investor’s faith in equity markets.  Being aware of the range of potential outcomes can help investors remain disciplined which over the long-term can increase the odds of a successful investment experience.

What can help investors endure the ups and downs? While there is no magic wand, an understanding of how markets work and trusting market prices are great starting points – furthermore, an asset allocation that aligns with your investment risk profile, desired lifestyle and financial goals, is also highly valuable.  Wells Gibson can play a critical role in helping investors sort through these and other issues as well as keeping them focused on their financial future and long‑term goals.


Investments involve risks.  The investment return and principal value of an investment may fluctuate so that an investor’s shares, when redeemed, might be worth more, or less than their original value.  Past performance is not a guarantee of future results.  There is no guarantee that strategies will be successful.

[1].   As measured by the arithmetic average of calendar year returns of the MSCI All Country World Index (gross div.) from 1988 to 2016. MSCI data © MSCI 2017, all rights reserved.

[2].   As measured by the S&P 500 Index from 1926–2016. S&P data provided by Standard & Poor’s Index Services Group.